The devastating March earthquake and tsunami that struck Japan shut down local nuclear and other power plants and caused an examination of Japan’s other nuclear reactors. The nation then focused on finding alternate energy sources to generate power. Boosting oil- and gas-fired electricity represents the only “quick fix.”
Already by June, imports of liquefied natural gas (LNG) by Japan’s ten power companies soared 31 percent higher than in June 2010. This comes against a backdrop of falling LNG imports from Indonesia, as production declined from fields that feed its old LNG plants such as Arun and Bontang, which provided the core of Japan’s LNG imports. In addition, the Indonesian government now reserves more new gas production for domestic consumption. Coincidentally, China and India, newcomers to the LNG business, increased their LNG imports by about 25 percent in the first half of 2011 over 2010.
The need for new and incremental LNG has led to several actions in Japan. First, as noted above, Japan’s power companies are aggressively seeking available spot LNG. This pushed spot LNG prices over the last few months from about $12 per million British thermal units (MMBtu—roughly equivalent to 1000 cubic feet) to $17/MMBtu. A Merrill Lynch report sees LNG prices rising to $25/MMBtu next year if Japan’s nuclear power stress tests prevent reactors from reconnecting to the national grid. Even if 5 gigawatts of nuclear power return next year, Japan will be shopping for an additional 4.8 million tons of LNG, according to Merrill Lynch.
Second, Japanese firms can invest abroad in gas production that could be exported to Japan. Even before the March catastrophe, Japan’s trading companies had bought into North American shale gas production. In 2010, Mitsui took a nearly one-third stake in Anadarko Petroleum’s Marcellus shale holdings; Sumitomo bought into both Marcellus East Coast and Barnett, TX, shale prospects; and Mitsubishi purchased half of Penn West’s British Columbia production. Despite a change in national leadership, Japan also has reverted to the Liberal Democratic Party past of “guiding” Japan Inc. via the Ministry of Economy, Trade and Industry. METI, through the Japan Oil, Gas and Metals National Corp. (JOGMEC), now will provide financial support to private Japanese corporations for overseas LNG exploration and development, according to a Denki Shimbun article. JOGMEC was created after the Japan National Oil Corporation was abolished, following a finding that decades of Industry Ministry funding for overseas oil and gas e&p had proved ineffective. Perhaps METI feels pressure from the increasing neo-mercantilist overseas ventures of China’s and India’s state-owned oil and gas companies.
Finally, a key potential source to meet Japan’s gas needs is LNG from the United States. In the midst of Japan’s travails, Conoco Phillips and Marathon closed down the only U.S. terminal supplying LNG to Japan. Last year they obtained an extension of their operating permit for the 40-year-old Kenai, Alaska, plant through 2013, but sent their final LNG shipment to Japan in March 2011. (In the 1980s, Japan’s government and utilities repeatedly rebuffed U.S. government pleas to support Alaska’s much larger proposed Yukon Pacific LNG project.)
Less than a decade ago, the U.S. sought to build more terminals to import LNG, as it forecast dropping pipeline gas imports from Canada and falling domestic production. But the surge in U.S. gas production from shale gas stood the market on its head.
New and old American LNG import terminals have requested U.S. government approval to either re-export LNG imports that are not needed in the U.S. market or to export U.S. gas. These include Cheniere’s Sabine Pass, LA; BG Group’s Lake Charles, LA; Dominion’s Cove Point, MD; and Freeport LNG, TX.
Prior to last week’s Asia-Pacific Economic Cooperation Transportation and Energy Ministerial conference in San Francisco, METI officials had asked the U.S. Energy Department to agree to a statement supporting U.S. LNG exports to Japan. DOE declined because in the U.S., the private sector, and not the government, develops and markets energy resources.
Still, Japan’s need for LNG presents a unique opportunity for U.S. firms. Operators of U.S. LNG receiving terminals can re-export unneeded LNG supplies to Japan over the next few years and use this time to lock in long-term LNG export deals with Japan that could fund converting their LNG terminals from import to export facilities. By 2015-16 the first of these American LNG export terminals could be exporting LNG under long-term contracts to Japan and elsewhere. Working with U.S. terminal owners, U.S. shale gas producers could find overseas markets for their gas that would lift the currently low gas price of about $4/MMBtu they receive in the U.S. closer to Asian prices four times higher. Chesapeake Energy, one of the top U.S. shale gas producers, already last year signed an MOU with terminal operator Cheniere Energy to explore exports. Dominion’s terminal in Maryland would provide a convenient outlet for Marcellus shale gas.
Clearly, sizable, long-term U.S. exports of LNG to Japan could provide sizable mutual benefits.
(Disclosure: I own stock in several U.S. gas producers, including Chesapeake.)
